Maleficiation

Various speakers at the diamond conference spoke about the risks of beneficiation.  The most forthright was Sergey Vybornov, the president of Alrosa commented on the failure of beneficiation in Russia as a long term strategy.  When Alrosa reduced the premium granted on rough for local production the industry rapidly declined.

But the way everybody was speaking, one would believe that beneficiation was the answer to all of Africa’s problems.  The idea is brilliant and the logic is simple; the total price of the rough at the mines is $13.1bn while the consumers are paying a total of $68.5bn, so let’s make sure some of that $55.4bn stays in Africa. 

Diamond manufacturers are desperate for rough so it is easy to force them to comply with beneficiation requirements so everybody, in theory, is happy.  Governments create lots of jobs, manufacturers receive their rough, workers have jobs with healthcare etc. and even the DTC is managing to stay in the picture.

The problem is that beneficiation is a tax on diamond manufacturing which is probably the least profitable stage in the pipeline.  Beneficiation creates inefficiencies in manufacturing which go directly against the DTC’s strategy of making the diamond pipeline more efficient.  This is a tax which cannot be recouped from increased revenues down the pipeline.

The conference touched on the moral obligation of Antwerp’s diamantaires to invest in Africa.  Diamond manufacturers and dealers hove no moral obligation to invest in Africa any more than Antwerp’s BMW dealers have to invest in Germany.  But just as BMW’s dealers and customer want to know that BMW maintains high social and ethical standards across its factories, the diamond industry has to expect the same from its mining suppliers.  The moral obligation rests with the mining companies and it is illogical to tax the diamond manufacturers for the obligation of the mining companies.

And if the aim is to benefit Africa and Africans, is beneficiation the best value for money?

If the vision is to create sustainable diamond industries in these countries then very clever government policies and regulations will be required to restrain the economic urge of the African sightholders to move the rough to India and China where polishing is far more efficient.  Alternatively, granting the African sightholders the better and larger goods while leaving the cheaper good for other polishing centres is a hidden subsidy which a few speakers spoke strongly against.

Can Botswana create a major diamond exchange in Gabarone and push out other contenders like Dubai?  Does the world need anymore diamond exchanges?

What will happen if in three years’ time half of the sightholders do not reapply because they are fed up with losing money every year?  Beneficiation could be left with thousands of semi-skilled workers who cannot do anything else, disillusioned sightholders with hefty losses etc.  Beneficiation rarely works as a long term standalone strategy.

From a macroeconomic perspective, perhaps it would be better to just tax the rough.  Tell DTC replace its VAS and give that money instead to the producing countries with the funds earmarked for education, healthcare, tourism and micro-financing loans which the World Bank has been so successful with in a variety of countries. 

For example, Botswana produces $3.4bn of rough.  And the total VAS the DTC charges on it is about $60m.  Under beneficiation, approximately 6,000 jobs will be created at an average pay of $3,500 p.a.  a total of $21m.  Add on a further $9m for other annual economic benefits of beneficiation and you are still at 50% of the VAS.  On the other hand, $60m would go a very long way in a country like Botswana.

Scrap the VAS and give it back to Africa for healthcare and education.  These have been proven to give the greatest economic return to both developing and advanced economies.  Leave the manufacturers to manufacturer wherever they want and keep that pipeline as efficient as possible so that demand for diamond jewellery will continue to rise.  If it is economically viable to manufacture in Africa, let the market decide.

socrates@diamondfinance.info